Market Overview

Atlas Financial Holdings Announces 2018 Second Quarter Financial Results

Share:

Company to Hold Conference Call on Tuesday, August 7, 2018 at 8:30
a.m. ET

Second Quarter 2018 Financial Performance Summary (comparisons to
Second Quarter 2017 unless noted):

  • Gross premiums written in each of the three month periods ended June
    30, 2018 and 2017 were $57.4 million
  • In-force premium increased 2.4% to $270.9 million
  • Total revenue increased by 1.8% to $56.7 million
  • Underwriting income for the second quarter 2018 was $6.2
    million, compared to $7.5 million
  • The combined ratio for the second quarter 2018 was 88.9%,
    compared to 86.2%
  • Net income for the second quarter 2018 was $5.6 million, or $0.47
    earnings per common share diluted, compared to $5.5 million, or $0.45
    earnings per common share diluted, representing an increase in
    earnings per common share diluted of $0.02
  • Annualized return on equity was 23.8% in the second quarter 2018
    compared to 16.2%

Atlas Financial Holdings, Inc. (NASDAQ:AFH) ("Atlas" or the "Company")
today reported its financial results for the second quarter ended
June 30, 2018.

Management Comments

Scott D. Wollney, Atlas' President and CEO, stated, "Atlas reported a
strong underwriting quarter, as our focus continues to be on bottom line
execution. We are very pleased to report a favorable combined ratio and
continue to emphasize underwriting margin over top line growth. During
the first half of this year, we've demonstrated price leadership in our
specialized niche market with rate increases in most areas across the
country. In addition, we continue to believe that the benefits of
implementation of predictive analytics in both underwriting and claims
will play an important role in margin expansion. Pricing levels are
higher than have been seen in more than a decade with indications that
the hard market condition will continue for some time. As has been the
case in prior years where rate increases were accelerated, renewal
retention and new business hit rates were lower than average. However,
we expect competitors to follow suit which should enable us to continue
to grow with expanding margins. In the meantime, a larger than
proportionate percentage of the business we did write is indicated to
generate above average profit."

Financial and Operational Review

Premiums Written: In each of the three month periods ended
June 30, 2018 and 2017, gross premiums written were $57.4 million.

Geographic Distribution: The Company is licensed in 49 states and
the District of Columbia. Atlas actively writes its core business in 42
of these states plus the District of Columbia. Compared to the three
month period ended June 30, 2017, Atlas experienced growth in gross
premiums written in its core business in 18 states for the three month
period ended June 30, 2018. Based on the Company's commitment to
optimize return on deployed capital, the Company utilizes predictive
analytics based pricing coupled with its strong value proposition to
grow market share in environments that are favorable and is prepared to
reduce exposure to those that are more challenging.

Combined Ratio: Atlas' combined ratio increased for the three
month period ended June 30, 2018 to 88.9%, compared to 86.2% in the
prior year period.

  • Loss Ratio: The loss ratio relating to claims incurred for the
    three month period ended June 30, 2018 was 61.1%, compared to 60.1%
    for the three month period ended June 30, 2017. The loss ratio
    increased over the prior year period primarily as a result of the
    Company's continued review of underwriting profitability by product
    and state and higher than expected claim cost associated with Atlas'
    participation in non-voluntary assigned risk pools and run-off
    commercial auto. Excluding the impact of assigned risk business, the
    loss ratio relating to the net claims incurred was 60.6% for the three
    month period ended June 30, 2018, compared to 59.8% for the three
    month period ended June 30, 2017.
  • The Company expects its loss ratio to continue to generally trend in a
    positive direction based on prior year and potential future pricing,
    underwriting and claims activities. As previously announced, the
    Company is utilizing machine learning based predictive analytics in
    the claim area, in addition to using it as an underwriting tool, to
    further benefit from the data and experience within its organization.
    Atlas believes this approach amplifies the value of the assets
    accumulated over its operating subsidiaries' many years spent focusing
    on niche target markets to model potential risk and deliver value for
    both customers and stakeholders. On a year over year basis, the
    Company expects its loss ratio to continue to generally trend in a
    positive direction based on prior year and potential future pricing,
    underwriting and claims activities.
  • Underwriting Expense Ratio: The underwriting expense ratio for
    the three month period ended June 30, 2018 was 27.8% compared to 26.1%
    for the three month period ended June 30, 2017. The ratio increased
    mainly because of higher other underwriting expenses in the quarter.
    The average was higher due to increases in bank charges, legal and
    professional fees, depreciation on new headquarters building and its
    furnishings and software costs offset by deferred policy acquisition
    costs ("DPAC") amortization, bad debt and rent expenses. Acquisition
    costs were higher than average in the quarter as well. As previously
    indicated, due to seasonality and the timing of certain expenses, the
    Company believes the full year expense ratio is a more indicative
    measure of efficiency that the ratio in any given quarter. Atlas
    remains focused on continually enhancing its value proposition through
    re-investment into research and development to ensure that its
    organization is able to continue leading the industry in terms of
    existing and developing niche markets on which Atlas focuses.

The table below details the comparisons of each component of the
Company's combined ratio for the periods indicated (after accounting for
the effect of quota share reinsurance):

   
Three Month Periods Ended   Six Month Periods Ended
June 30, 2018   June 30, 2017   June 30, 2018   June 30, 2017
Loss Ratio:          
Current accident year 60.7 % 59.8 % 60.7 % 59.9 %
Prior accident years 0.4   0.3   1.2   0.4  
Loss Ratio 61.1 60.1 61.9 60.3
Underwriting Expense Ratio:
Acquisition cost ratio 12.1 12.3 11.4 11.5
Other underwriting expense ratio 15.1 12.4 16.0 14.0
DPAC amortization ratio 0.1   0.9   (0.2 ) 0.1  
Underwriting expense ratio before expenses related to stock purchase
agreements and share-based compensation expenses
27.3 25.6 27.2 25.6
Expenses recovered related to stock purchase agreement ratio (0.5 )
Share-based compensation expense ratio 0.5   0.5   0.5   0.6  
Underwriting expense ratio 27.8   % 26.1   % 27.2   % 26.2   %
Total combined ratio 88.9   % 86.2   % 89.1   % 86.5   %
 

As the Company continues the use of quota share reinsurance, and
potentially changes the percentage of ceded premiums under its contract,
the impact on the individual ratios of acquisition cost and other
underwriting expense will vary. On a pro-forma basis, as if there was no
quota share reinsurance in place, the components of the underwriting
expense ratio for the periods indicated would have been as follows:

       
Three Month Periods Ended   Six Month Periods Ended
June 30, 2018   June 30, 2017   June 30, 2018   June 30, 2017
Acquisition costs 19.1 %   14.9 %   16.2 %   14.3 %
Other insurance general and administrative expenses 13.3 11.0 14.2 12.5
DPAC amortization 0.1 0.8 (0.2 ) 0.1
Expenses recovered related to stock purchase agreements (0.4 )
Share-based compensation expense 0.5     0.5     0.5     0.5  
Total underwriting expense ratio 33.0 %   27.2 %   30.3 %   27.4 %
 

Underwriting Results: Underwriting profit was $6.2 million for
the three month period ended June 30, 2018, compared to $7.5 million in
the same period of the prior year.

Net Income before Income Taxes: Net income before income taxes
was $7.1 million for the three month period ended June 30, 2018,
compared to $8.5 million in the same period of the prior year.

Income Taxes: Atlas recognized tax expense of $1.5 million for
the three month period ended June 30, 2018 compared to $3.0 million in
the same period of the prior year.

Net Income: Atlas reported net income of $5.6 million for the
three month period ended June 30, 2018, compared to $5.5 million for the
three month period ended June 30, 2017.

Earnings per common share ("EPS"): Atlas generated $0.47 earnings
per common share diluted for the three month period ended June 30, 2018
compared to $0.45 for the three month period ended June 30, 2017.

Share Count: The following chart illustrates Atlas' potential
dilutive common shares for the three month periods ended June 30, 2018
and 2017:

   
Three Month Periods Ended
June 30, 2018   June 30, 2017
Weighted average common shares outstanding 11,936,970   12,045,519
Dilutive potential ordinary shares:
Dilutive stock options 15,296     136,361
Dilutive average common shares outstanding 11,952,266     12,181,880
 

The effects of convertible instruments are excluded from the computation
of earnings per common share diluted in periods in which the effect
would be anti-dilutive. For the three month periods ended June 30, 2018
and June 30, 2017, all exercisable stock options were deemed to be
dilutive.

Balance Sheet/Investment Overview

Book Value: Book value per common share was $8.06 based on
11,944,378 common shares outstanding as of June 30, 2018, compared to
$7.42 based on 12,178,857 common shares outstanding as of December 31,
2017. Book value per common share of $8.06 increased by $0.64 relative
to December 31, 2017 as follows:

 
$ 0.90 increase related to net income after tax and before items indicated
below;
(0.01 ) decrease related to the loss from change in fair value of equity
securities;
0.03 increase related to the change in net realized investment gains
after tax;
(0.23 ) decrease related to the change in unrealized gains/losses after tax;
(0.09 ) decrease related to share repurchases; and
0.04   increase related to share-based compensation.
$ 0.64   total increase from December 31, 2017 book value per
common share
 

Cash and Invested Assets: Cash and invested assets as of June 30,
2018 totaled $226.4 million as compared to $243.5 million as of
December 31, 2017.

Investment Strategy: Atlas aligns its securities portfolio to
support the liabilities and operating cash needs of its insurance
subsidiaries, to preserve capital and to generate investment returns.
Atlas invests predominantly in fixed income securities with overall
maturities that correlate with the payout patterns of Atlas' claims
liabilities and other liquidity needs. Other than fixed income
investments are limited to an appropriately small percentage of its
portfolio and are generally opportunities identified through the
Company's specialty focus or by leveraging the resources of its business
partners. As of June 30, 2018, the average life on the Company's
portfolio was 5.2 years with a duration of 4.2 years. The Company's
investment allocations will be regularly reviewed based on market
conditions with a continued emphasis on capital preservation to support
growth in its operating business. During the first half of the year, the
Company took steps to reduce its exposure to other than fixed income
investments. Based on redemption windows and other timing
considerations, the result of this changes will be seen primarily in the
second half of the year.

Net Investment Income / Net Investment Realized Gains: Atlas
generated net investment income of $1.2 million and $1.3 million for the
quarters ended June 30, 2018 and 2017, respectively, as well as $154,000
and $284,000 of net realized gains, respectively. The decrease in net
investment income resulted from lower returns on equity method
investments offset by higher interest income on our fixed income
securities portfolio and lower investment expenses. This higher interest
income on fixed income securities resulted from increased yields on the
fixed income securities portfolio. The gross annualized investment yield
on the Company's fixed income securities was 2.7% and 2.3% for the
quarters ended June 30, 2018 and 2017, respectively. The increase in the
gross annualized yield was due to management's decision to use the
proceeds from the maturity and sales of certain fixed income securities
to purchase fixed income securities with higher yields. The gross
annualized investment yield on the Company's cash and cash equivalents
was 0.7% and 0.3% for the quarters ended June 30, 2018 and 2017,
respectively. The increase in gross yield on cash investments was due to
higher interest rates on certain accounts and higher balances in
accounts earning greater interest. Net realized gains for the quarter
ended June 30, 2018 were primarily comprised of gains from the sale of
equity securities and other investments, partially offset by losses from
the sale of fixed income securities.

Beginning January 1, 2018, Atlas adopted Accounting Standards Update
2016-01, which requires changes in the unrealized market value of
equities held at fair value to be recorded through net income. Atlas
recorded a gain of $33,000 through net income for the quarter ended
June 30, 2018 related to the changes in unrealized amounts on equities
held at fair value.

Outlook for 2018

Throughout 2018, the Company has seen general market hardening
throughout commercial auto and in its specific market niche, and
continues to implement sizable rate increases. The Company has always
emphasized that underwriting profit will take precedent over top line
growth. As a result of the impact in this rate increase in the
short-term, gross written premiums may not exceed the previously stated
$300 million. If premium levels trend lower, the Company may reduce its
use of quota share reinsurance.

Based on expected underwriting results and the subsequent profitability
filtering through the Company's lines of business as a result of these
rate increases and other underwriting and claims activities, Atlas
reiterates that it expects to earn net earnings per share exceeding
$2.00 and achieve return-on-equity of at least 20%.

Mr. Wollney concluded, "We have been focused on implementing price
leadership and underwriting discipline throughout 2018. Our light
commercial auto market continues to grow and, based on their specific
needs, public auto operators have continued to respond positively to
Atlas as a specialty niche writer. Our strong value proposition
resonates with traditional operators and we are building an increasing
pipeline of opportunities created by transportation network companies
("TNCs"). We have seen no indicators of a new market entrant and expect
that there would generally be an 18 month lead time, which should allow
Atlas to optimize return on capital through underwriting margin and
operating leverage. Going forward we expect premiums to reach
historically higher levels as our competitors once again follow our
price leadership. We have seen loss trends remain stable and for the
year should trend in a positive direction, with pricing elasticity for
those accounts with our highest level of scored accounts. We are
committed to maintaining operating efficiency with a continued focus on
increasing rate versus exposure."

   

Conference Call Details

 
Date/Time: Tuesday, August 7, 2018 - 8:30 a.m. ET
Participant Dial-In Numbers:
(United States): 877-423-9817
(International): 201-493-6770
 

To access the call, please dial-in approximately five minutes before the
start time and, when asked, provide the operator with passcode "Atlas".

An accompanying slide presentation will be available in .pdf format on
the investor relations page of the Company's website after issuance of
the earnings release.

Webcast

The call will also be simultaneously webcast over the Internet via the
"Investor Relations" section of Atlas' website at www.atlas-fin.com/investorrelations
or by clicking on the conference call link: http://atlas-fin.equisolvewebcast.com/q2-2018.
Audio and a transcript of the call will be archived on the Company's
website.

About Atlas

The primary business of Atlas is commercial automobile insurance in the
United States, with a niche market orientation and focus on insurance
for the "light" commercial automobile sector including taxi cabs,
non-emergency para-transit, limousine/livery (including certain
transportation network company drivers) and business auto. The business
of Atlas is carried on through its subsidiaries American Country
Insurance Company, American Service Insurance Company, Inc., Gateway
Insurance Company, Global Liberty Insurance Company of New York, Anchor
Group Management, Inc., Plainview Premium Finance Company, Inc., and
Plainview Premium Finance Company of California, Inc. Atlas' insurance
subsidiaries have decades of experience with a commitment to always
being an industry leader in these specialized areas of insurance.

For more information about Atlas, please visit www.atlas-fin.com.

Financial Information

Atlas' financial statements reflect consolidated results of Atlas'
subsidiaries: American Insurance Acquisition Inc., American Country
Insurance Company, American Service Insurance Company, Inc., Gateway
Insurance Company, Global Liberty Insurance Company of New York, Anchor
Holdings Group, Inc., Anchor Group Management, Inc., Plainview Premium
Finance Company, Inc., Plainview Premium Finance Company of California,
Inc., UBI Holdings Inc., and DriveOn Digital IP Inc. Additional
information about Atlas, including a copy of Atlas' 2017 Annual Report
on Form 10-K financial statements and Management Discussion & Analysis,
can be accessed via the U.S. Securities and Exchange Commission internet
site at www.sec.gov
or through Atlas' website at http://www.atlas-fin.com/InvestorRelations/FinancialReports.aspx.

Forward-Looking Statements

This release includes forward-looking statements regarding Atlas and its
insurance subsidiaries and businesses. Such statements are based on the
current expectations of the management of each entity. The words
"anticipate", "expect", "believe", "may", "should", "estimate",
"project", "outlook", "forecast" or similar words are used to identify
such forward looking information. The forward-looking events and
circumstances discussed in this release may not occur and could differ
materially as a result of known and unknown risk factors and
uncertainties affecting the Companies, including risks regarding the
insurance industry, economic factors and the equity markets generally
and the risk factors discussed in the "Risk Factors" section of the
Company's 2017 Annual Report on Form 10-K. No forward-looking statement
can be guaranteed. Except as required by applicable securities laws,
forward-looking statements speak only as of the date on which they are
made and Atlas and its subsidiaries undertake no obligation to publicly
update or revise any forward-looking statement, whether as a result of
new information, future events, or otherwise.

 
ATLAS FINANCIAL HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE
INCOME

($ in ‘000s, except for share and per share data)

 
  Three Month Periods Ended   Six Month Periods Ended
Condensed Consolidated Statements of Income

June 30, 2018
(unaudited)

 

June 30, 2017
(unaudited)

 

June 30, 2018
(unaudited)

 

June 30, 2017
(unaudited)

Net premiums earned $ 55,359   $ 54,049   $ 111,251   $ 102,475
Net investment income 1,167 1,266 2,131 2,409
Income (loss) from change in fair value of equity securities 33 (95 )
Net realized gains 154 284 447 418
Other income 16     103     180     217  
Total revenue 56,729 55,702 113,914 105,519
Net claims incurred 33,809 32,469 68,855 61,769
Acquisition costs 6,680 6,670 12,656 11,766
Other underwriting expenses 8,602 7,342 17,921 14,933
Amortization of intangible assets 98 98 195 195
Interest expense 461 644 916 912
Expenses recovered pursuant to stock purchase agreement         (520 )    
Total expenses 49,650     47,223     100,023     89,575  
Income from operations before income taxes 7,079 8,479 13,891 15,944
Income tax expense 1,503     2,969     2,786     5,582  
Net income attributable to common shareholders $ 5,576     $ 5,510     $ 11,105     $ 10,362  
 
Basic weighted average common shares outstanding 11,936,970 12,045,519 12,046,855 12,045,519
Earnings per common share, basic $ 0.47 $ 0.46 $ 0.92 $ 0.86
Diluted weighted average common shares outstanding 11,952,266 12,181,880 12,070,343 12,191,646
Earnings per common share, diluted $ 0.47 $ 0.45 $ 0.92 $ 0.85
 
Condensed Consolidated Statements of Comprehensive Income
 
Net income $ 5,576 $ 5,510 $ 11,105 $ 10,362
 
Other comprehensive (loss) income:
Changes in net unrealized investment (losses) gains (933 ) 733 (3,701 ) 1,082
Reclassification to net income 52 (150 ) 210 (239 )
Effect of income taxes 184     (204 )   733     (295 )
Other comprehensive (loss) income (697 )   379     (2,758 )   548  
Total comprehensive income $ 4,879     $ 5,889     $ 8,347     $ 10,910  
 
 
ATLAS FINANCIAL HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

($ in ‘000s, except for share and per share data)

   

June 30, 2018
(unaudited)

 

December 31,
2017

Assets

Investments
Fixed income securities, available for sale, at fair value
(amortized cost $142,100 and $158,411)
$ 138,182 $ 157,984
Equity securities, at fair value (cost $6,081 and $7,969) 6,463 8,446
Other investments 29,063     31,438  
Total Investments 173,708 197,868
Cash and cash equivalents 52,707 45,615
Accrued investment income 1,355 1,248
Premiums receivable (net of allowance of $3,766 and $3,418) 91,056 79,664
Reinsurance recoverables on amounts paid 10,663 7,982
Reinsurance recoverables on amounts unpaid 46,614 53,402
Prepaid reinsurance premiums 24,213 12,878
Deferred policy acquisition costs 13,956 14,797
Deferred tax asset, net 14,636 16,985
Goodwill 2,726 2,726
Intangible assets, net 3,950 4,145
Property and equipment, net 28,356 24,439
Other assets 19,191     20,754  
Total Assets $ 483,131     $ 482,503  
 

Liabilities

Claims liabilities $ 187,170 $ 211,648
Unearned premium reserves 145,078 128,043
Due to reinsurers 15,586 8,411
Notes payable, net 24,143 24,031
Other liabilities and accrued expenses 14,932     19,725  
Total Liabilities $ 386,909     $ 391,858  
 

Shareholders' Equity

Ordinary voting common shares, $0.003 par value, 266,666,667 shares
authorized, shares issued: June 30, 2018 - 12,192,475 and December
31, 2017 - 12,164,041; shares outstanding: June 30, 2018 -
11,936,970 and December 31, 2017 - 12,164,041
$ 36 $ 36
Restricted voting common shares, $0.003 par value, 33,333,334 shares
authorized, shares issued and outstanding: June 30, 2018 and
December 31, 2017 - 0
Additional paid-in capital 201,668 201,105
Treasury stock, at cost: June 30, 2018 - 255,505 and December 31,
2017 - 0 shares of ordinary voting common shares
(3,000 )
Retained deficit (99,386 ) (110,535 )
Accumulated other comprehensive (loss) income, net of tax (3,096 )   39  
Total Shareholders' Equity 96,222     90,645  
Total Liabilities and Shareholders' Equity $ 483,131     $ 482,503  
 

Use of Non-U.S. GAAP Financial Measurements

Atlas uses these non-GAAP financial measures in order to present its
financial condition and results of operations in the way it believes
will be most meaningful and representative of its business results. The
non-GAAP financial measures that Atlas presents may not be comparable to
similarly-named measures reported by other companies.

Adjusted operating income, before income taxes includes both
underwriting income and loss and net investment income, but excludes net
realized gains and losses, legal and professional expense incurred
related to business combinations, interest expense, net impairment
charges recognized in earnings and other items. Underwriting income is
derived by reducing net premiums earned by net claims incurred, policy
acquisition costs and general operating expenses.

 
Reconciliation of U.S. GAAP Net Income to Adjusted Operating
Income, Before Income Taxes ($ in ‘000s, except per share data)
     
Three Month Periods Ended Six Month Periods Ended
June 30, 2018 June 30, 2017 June 30, 2018 June 30, 2017
Net income $ 5,576   $ 0.47 $ 5,510   $ 0.45 $ 11,105 $ 0.92 $ 10,362   $ 0.85
Add: income tax expense 1,503 0.12 2,969 0.25 2,786 0.22 5,582 0.46
Add: expenses recovered pursuant to stock purchase agreement (520 ) (0.04 )
Add: interest expense 461 0.04 644 0.05 916 0.08 912 0.07
Less: income (loss) from change in fair value of equity securities 33 (95 ) (0.01 )
Less: net realized investment gains 154 0.02 284 0.02 447 0.04 418 0.03
Less: other income 16     103   0.01   180   0.01   217   0.02
Adjusted operating income, before income taxes $ 7,337   $ 0.61   $ 8,736   $ 0.72   $ 13,755   $ 1.14   $ 16,221   $ 1.33
 

After-tax return on average common equity is derived by
subtracting preferred share dividends accrued from net income and
dividing by average common equity. Common equity is total shareholders'
equity less preferred shares and cumulative preferred share dividends
accrued. Average common equity is the average of common equity at the
beginning and the ending of the reporting period.

 
Reconciliation of U.S. GAAP Shareholders' Equity to Common Equity
($ in ‘000s)
                       
As of:

June 30,
2018

 

March 31,
2018

 

December 31,
2017

 

June 30,
2017

 

March 31,
2017

 

December 31,
2016

Total shareholders' equity $ 96,222   $ 91,390   $ 90,645   $ 138,857   $ 132,683   $ 127,342
Less: accrued dividends on preferred shares     333     333     333     333     333
Total common equity $ 96,222     $ 91,057     $ 90,312     $ 138,524     $ 132,350     $ 127,009
 
 
Reconciliation of U.S. GAAP Return on Equity to Return on Common
Equity ($ in ‘000s)
       
Three Month Periods Ended   Six Month Periods Ended
June 30, 2018   June 30, 2017   June 30, 2018   June 30, 2017
Net income $ 5,576   $ 5,510   $ 11,105   $ 10,362
Average equity 93,806 135,769 93,434 133,099
Return on equity 23.8 % 16.2 % 23.8 % 15.6 %
 
Net income attributable to common shareholders $ 5,576 $ 5,510 $ 11,105 $ 10,362
Average common equity 93,640 135,437 93,267 132,767
Return on average common equity 23.8 % 16.3 % 23.8 % 15.6 %

View Comments and Join the Discussion!